An increase at the expense of mortgage borrowing could cause the UK housing market to collapse after the biggest decrease in home prices per month since 2008.
The market has been overheated with house prices seeing an increase of over 10% during the pandemic. The prices of property fell towards at the close of 2022 however, asking prices surpassed forecasts in January 2023 by growing by 0.9 percent, according the property website Rightmove.
What is the reason UK house prices so high?
House prices are falling from their astronomical heights during the pandemic (more about this later). But they remain very high by historical standards and have been increasing much more quickly than wages.
The cost of a UK home has nearly trebled since the beginning century. The prices have gone up by more than 60% in the last 10 years, according the Nationwide Building Society.
From a distance, it looks like the main long-term reason has been demand and supply: the shortage of housing stock and high demand for properties.
While this is definitely an important factor that low interest rates had actually been driving the housing market since the start of the epidemic. Being able to borrow money at a lower cost helps people to pay for mortgages.
However, since December 2021, in the Bank of England has increased the base rate nine times from its record low of 0.1 percent. The base interest rate now sits at 3.5%.
This is in response to inflation that has risen dramatically which reached 10.7 per cent in the year from November.
Increased mortgage rates have caused it to be more expensive to purchase a home, and the market for housing has started to take an eagle’s strike, with prices falling for four months in the same time.
The next rate hike is expected in 2023. This could severely dampen the housing market because it will mean that mortgage payments will increase.
The crisis of cost of living is expected to be the primary cause of a slowdown in home prices. As budgets of households come under pressure, fewer can afford to stretch themselves to buy houses.
There is a possibility that first-time buyers will be cautious until they see what happens and whether it will have an impact on the market.
Are house prices down?
House price shows that house price growth is slowing , and even reversing. This is due to the fact that the demand of buyers is beginning to decrease since their living expenses rise.
Property website Zoopla said that the demand for housing has dropped by 50% from the year to December 2022.
Below we present the house price figures from two major lenders.
Halifax house price index
The most recent data from Halifax the UK’s biggest mortgage provider, showed an 1.5 percentage decrease in prices in December. This is the fourth month of dips in a row and puts the average UK home price at PS281,272.
Prior to that , the price of homes had fallen 2.3 percent in November, which was the biggest drop since the 2008 financial crisis.
However, the annual rate of growth slowed from 4.6 percent to just 2%, a huge decline from June’s highest of 12.5%.
The lender – which is the UK’s largest mortgage provider – has said that it would be prudent to not rule out substantial annual price reductions in the next few months.
A rise in interest rates and uncertainty about how much costs of living increases influence household bills are affecting the market.
The two-year fixed interest rate climbed to 6.55 percent in October, but this is now down to 6%. Here’s more detail on the average mortgage rate and the way they have changed.
This has seen households paying most of their income in mortgage payments since 1989 . This is at an age when the rate of inflation is running close to a high of 40 years.
Nationwide house price index
The price of houses increased by 2.8 percent during the year to December, falling from an annual increase of 4.4 percent, according to Nationwide Building Society.
It also marks the 0.1 percent monthly decrease in house prices, the fourth monthly drop over a period of time. The average price for houses is PS262,068.
On November 1, Nationwide reported an increase of 1.4 percentage drop. This was the most significant since June 2020, during the peak of the Covid pandemic.
“The market has definitely been affected by the turmoil that followed the mini-budget, leading to a dramatic increase in market interest rates.” said Robert Gardner, Nationwide’s chief economist.
“Higher cost of borrowing have contributed to the strain on housing affordability in a period when household finances are already feeling the pressure from high inflation.”
The rate change for mortgages indicates a rise in the base rate of interest – currently 3.5 percent – which is imposed by the Bank of England as part of its efforts to combat the rise in inflation that is due to the aftermath of the Russian war in Ukraine.
However, it also highlighted a range of factors that are influencing prices , including the lack of new homes, strong wage growth and cuts to stamp duty, which were announced in the government’s mini-budget.
Are there regional differences in the cost of housing?
There are numerous regional variations in prices for homes, with areas seeing different rates of expansion.
However, all nations and regions experienced a rise in home prices annually in 2022. However, the pace of growth has been slowed.
Nationally, we compared average prices for houses from October through December the same timeframe in 2021:
East Anglia was the strongest region to perform in England in terms of average prices growing by 6.6% compared to the same three months in 2021
Scotland was the least-performing region, with house prices growth of 3.3%
Wales has seen a dramatic slowdown in growth, slowing to 4.5 percent from 12.1% in the previous three months.
Northern Ireland saw prices increase by 5.5 percent, much lower than the 12.1 per cent increase that was recorded in the third quarter of 2021.
House price growth was second slowest in London. But the prices in London remain the most expensive in the UK at PS528,000. That’s almost triple the UK average
How are prices different for different types of property?
The pandemic has led to huge changes in home preferences, and mortgage lenders have continued to see differences in price patterns between different kinds of properties.
Since the onset of the pandemic, prices of detached, family homes are increasing much more quickly than flats.
Many people continue working from home few times a week, and there’s still a need for larger spaces with enough space for a home office. As this hybrid approach to working continues, so will the trend of larger buildings.
Figures of Nationwide Building Society show that the average price of:
A detached house has increased by 26% or around PS78,000 in cash terms, between the years 2020 between 2020 and 2022. If we look at 2022 as a single year detached properties grew by 5.9%
Flats rose by 13.4 percent on average, (PS23,000) between 2020 between 2020 and 2022. If we look at 2022, the average price of flats rose by 2.1%
Figures from figures from the Office for National Statistics show an unintentionally different trend with terraced and semi-detached houses rising in price the most. From October to 2022 show that the average cost of:
Houses with detached homes amounted to PS468,376, which is up 13% over the past year.
Semi-detached homes cost PS287,383, which is an increase of 14%.
Terraced houses hit PS242,690, an increase of 14%.
Flats were PS235,237 at the time, with an uptick of 8.6%
Is there a greater demand for rural areas?
Since working from home is likely to become a permanent element of many people’s lives and the need for property outside cities has jumped.
Lockdowns highlighted the importance of space and greenery, leading to an increase in interest in homes in rural and coastal regions, as per ONS statistics.
In some hotspots, house prices have increased by three times the national average. These include places like:
Conwy in North Wales
North Devon
Richmondshire is located in the Yorkshire Dales
Estate agents are reporting a lot of interest in remote and rural properties in Scotland.
However, some people have been returning to the city and commuter belts, which has driven up the average price of properties in these regions.
Will the prices of homes plummet in 2023?
We can’t be 100% certain what the future will bring recent increases within the UK base interest rate have led to fears that the market might plunge.
Following the controversial mini-budget of September several mortgage lenders retracted agreements and increased rates, pushing up the cost of mortgages across the range.
With the Bank of England has raised the base rate of interest to 3.5 percent, these effects can be intensified. The effect is likely to decrease demand among buyers looking to buy and could cause home prices to fall.
Other factors might dampen the explosive growth we have seen in recent years, specifically the current cost of living crisis. The record prices for gasoline, energy, inflation rising and tax increases mean that most households are left with less money to invest in homes.
While the rate of growth in house prices has been high across the board, home prices are now falling each month. If demand slows down and people are able to save less then the rate of house price growth could fall further.
But that doesn’t mean property prices will go down as demand still tends to outstrip the supply of homes across many regions of the UK.
In actual fact, the portal for property Rightmove revealed a 0.9 percent rise on asking prices in January, the biggest increase in the same time of year to date since January 2020. The mortgage rates are dropping and buyers are coming back into the marketplace.
Demand is likely to be able to cushion the blow, which means home prices may fall rather than crashing.
House price predictions
In light of the constant race for space, a lot of projections on the market for housing remain positive. However the perfect combination of high inflation and rates of interest is likely to slow the growth of the housing market.
Here are some predictions for what’s to come:
The month of January, 2023 Halifax forecast that prices for homes would fall around eight percent throughout the year. The Halifax forecast said that a fall of 8% would result in the price of the average house returning to April 2021 levels, which still remain significantly higher than pre-pandemic levels.
In December 2022 Robert Gardner from Nationwide said house prices are likely to see a modest decline in 2023 of about 5%. According to him, there needs for a dramatic decline in the labour market to generate the double-digit falls that have been suggested by forecasters.
Lloyds Bank has forecast house prices to fall by 8.8% by 2023. It has set up PS668 million to pay off bad debt, which could result from borrowers struggling to pay their debts
The Office for Budget Responsibility has predicted that prices will drop by 9 percent between 2022 and 2024 then begin to increase through 2025.
In November 2022, property website Zoopla said it expected prices to drop by 5% by 2023.
The Bank of England has predicted the growth in house prices to be slower later in this year. Mortgage providers are predicted to reduce credit as the economy struggle.
In July 2022, Wesley Davidson, founder of mortgage broker Fox Davidson, said he believed the average UK home price would fall around 10% within 12 months
The high inflation rate has led to an increase in interest rates and it is likely to continue, slowing the housing market down.
Prices for homes increased by 0.9 percent in January 2023, which brought the average cost to PS362,438, according to property website Rightmove. However, the number of buyers of homes has decreased by 36% from January the previous year.
Zoopla’s home price index has found that sellers were forced to reduce asking prices by approximately 4% to ensure an offer recently. Surveyors have also reported fewer enquiries from new buyers.
All of this could result in a ripple effect on the prices that houses are being sold for since a decrease in demand means that more buyers are able to bargain over the price of properties.
So far , the slowdown has been sporadic, however it is possible that it will accelerate as interest rates rise.
The positive news is that home buyers are now able to save money in tax by taking advantage of the cut in stamp duty rates.
Copyright Reseau Actu.